What It Means (Simple Explanation)
Deferred revenue is money you’ve been paid—but haven’t earned yet. If a customer pays upfront for a year, you can’t call it revenue right away. It sits as a liability until you deliver the service.
Example
A customer pays $1,200 for a 12-month subscription. You recognize $100 each month. The rest? That’s deferred until it’s earned.
Why This Matters (To SaaS & Finance Teams)
You need to know how much of your cash is actually “earned” revenue. Getting this wrong skews your books, confuses investors, and distorts forecasts.
Ordway tracks deferred revenue automatically by linking payments to service periods inside its billing platform. It keeps your revenue recognition clean and auditable.
How It Works (Break It Down Simply)
- Customer pays in advance (e.g., annual plan)
- Payment gets logged as deferred revenue (liability)
- Each month, a portion moves from deferred to recognized revenue
- When the service is fully delivered, the balance is zero
This is required for GAAP accounting under ASC 606, IFRS 15, and other accounting standards.
Common Headaches
- Forgetting to defer revenue and over-reporting GAAP revenue
- Complex revenue schedules for multi-line contracts
- Spreadsheets that become unmanageable with customer growth
- Failed audits or investor concerns during fundraising
Ordway automates this with real-time revenue schedules tied to contracts.
Best Practices
- Don’t recognize revenue upfront for annual contracts
- Use billing events to trigger deferred revenue entries
- Track deferred revenue by customer and plan
- Keep schedules visible to finance, not just buried in files
- Recalculate when contracts are upgraded or renewed
When to Track Deferred Revenue
Any time you bill in advance—monthly, quarterly, or annually. Especially important for proper GAAP financial reporting to support audits, outside investments, and planning.
KPI Impact / What It Affects
Deferred revenue affects revenue forecasts, compliance, cash flow clarity, and trust in financial statements. It’s a sign of future revenue already secured.
FAQ Section (Quick Answers to Real Questions)
What is deferred revenue in SaaS?
Money paid upfront for services not yet delivered.
Is it a liability or revenue?
It’s a liability—until you earn it.
How do I recognize it?
Spread it across the service period. Example: monthly for annual plans.
What happens if I get this wrong?
It can misstate earnings and create audit problems.
Want to Go Deeper?
Let Ordway take the manual work out of deferred revenue tracking. Request a demo
Related Posts
Freemium to Paid: How to Get B2B SaaS Users to Upgrade
